Having made new record lows for 7 days in a row, various technical triggers, short squeezes, and rumors of Central Bank intervention prompted the Russian Ruble to rally over 5% - the biggest swing since 1998 as chatter of a very aggressive (greater than 50bp) rate-hike at tomorrow's meeting.
Massive shortr squeeze
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and intraday the move is immense!
[7]
Commerzbank suggests intervention:
...looks like either a substantial one-off central bank FX intervention, or indirect intervention to the local banking community, Simon Quijano-Evans, head of EM Research at Commerzbank
If RUB recovery is not due to any geopolitical progress, a strong message in defense of the RUB is needed in tmrw’s CBR meeting: Quijano-Evans
This would include a rate hike of at least 200bps, and/or one-off FX interventions, and dropping the corridor policy
UBS' EM desk suggest 3 drivers:
a) hope of rapproachment between Ukraine and Russia
b) risk that central bank hikes rates very aggressively tomorrow
c) expectations that oil price isn’t going much lower from here; small tactical rally is possible near term
And technical drivers:
"Ruble may be poised to appreciate against the U.S. dollar in coming weeks after the slow-stochastics study, which measure the velocity of a security’s price movement, exhibits a bullish crossover near the oversold threshold,” says Bloomberg Technical Analyst Sejul Gokal. “A similar crossover in March this year, led to a 6.2% appreciation of the the Russian ruble versus the greenback, over a period of 13-weeks.”
As Goldman adds,
The sharp decline in the Ruble and US$28bn in reserve losses month-to-date are likely to be of significant concern to the CBR, given related risks to financial stability as well as to inflation expectations, and we think this is likely to cause the CBR to enact decisive changes to its FX policy.
While the recent uptick in inflation expectations increases the risk of a larger rate hike and this is now being priced by the market, we continue to expect the CBR to hike its policy rate by 50bp at its board meeting on Friday morning (October 31).
In our view, the rationale for a rate hike of this magnitude would be grounded in the recent deterioration in inflation dynamics, and we think a larger rate hike would not be the most cost-effective tool to stem the recent weakening of the Ruble. Given the options available, we expect the Bank to abolish its current intervention rule and conduct a discretionary currency intervention of a magnitude sufficient to stabilize the FX market and signal to the market that the CBR views the recent FX volatility as a significant risk to its mandate.
Such a policy choice would likely be more effective and significantly less costly than a large policy rate hike.
Timing the change to the FX policy is difficult. Nonetheless, we think that a change to FX policy prior to Friday’s rate decision would give the CBR additional policy optionality with respect to its interest rate decision. Our expectations for the CBR’s decision continue to suggest that OFZs and Russian sovereign credit remain attractive.
